| Over the last two decades, China’s unban infrastructure has experienced an amazingly rapid development. And China’s urbanization will be looking forward to stepping into another enhancive stage in the next twenty years. This makes the issue that to finance fairly and effectively for the construction of urban infrastructure, will still be an essential issue for the local governments. This paper will be analyzed from the prospective of financing mode innovation of local governments, trying to explain the intrinsic efficiency mechanism and risk accumulation mechanism that formed along with the above rapid improvement, and then comes up with suggestions on the financing mode of the future infrastructure construction.Currently, the Local Government Financing Vehicles (LGFVs) is one of the most important financing modes of the urban infrastructure. Although this concept is just known recently, its embryo has been formed in the relatively developed areas ever since1980s. As has been existed and developed for decades, LGFVs is proved to be effective and useful. However, as the changes in urbanization, the risks of LGFVs do reveal gradually. More and more experts suggest that it is necessary to build a financing platform and corresponding regulations has been put forward by the State Department. There are lots of discussions on LGFVs both in academia and practice. Therefore, it’s necessary to make a throughout research on LGFVs, particularly in aspects of the mechanism and conditions that help LGFVs to become an efficient financing mode. Only after this detailed study can we learn the elements of each risk, such as how it accumulates and acts, and can we make balance between efficiency and risks.This paper first describes a clear definition and characteristics of Urban Infrastructure, and then displays other main financing modes, comparing to LGFVs. Second, after making a brief introduction of the mechanism of LGFVs, we find that LGFVs not only provides convenience to funds, but also encourages the local governments to construct infrastructures, that is, under LGFVs, the construction is bundled with land development, thus makes local governments refinancing themselves. Moreover, we discover three essential conditions of LGFVs:budget constraints, intra governance and nonmonetary economic conditions. After understanding the necessary foundations of efficiency, we emphasized on analyzing the three intrinsic risks of LGFVs:the fiscal risk due to budget constraints and moral risks, the possible financial risk due to monetary economy, and the social risk of worsening income distribution contractions led by LGFVs. Then, we undertake an investigation on four financing LGFVs in a city, in order to combine theoretical research with empirical analysis. The last part is conclusion and suggestions.Based on the research, there are two key findings in this paper. Firstly, we find that LGFVs is not only a tool of finance as known, but also an effective incentive mode for local governments to construct more urban infrastructures. In an economic view, LGFVs or the local governments act as land developers aiming at profit maximization, and the benefits due to infrastructure improvement will be capitalized by the land value, encouraging the local government to reinvest. Secondly, after a detailed research on LGFVs potential risks, we find that the fiscal risk is mostly originated from local governments’budget constraints and moral risks, and the financial risk is basically due to overly loose monetary policies, rather than the LGFVs itself. However, the social risk is a property of LGFVs’ mechanism, acting just as the other side of the coin. The allocation problems of financing costs between residents and new immigrants may need solving in the next decades.This paper comes up with three suggestions. First, systemize reasonable political regulations, and reinforce the budget constraints for LGFVs. This aims at controlling the fiscal risk while not expropriate the efficiency. Second, establish a withdraw system for LGFVs, and improve the local government bond issuance system. Last but not least, conduct series of fiscal expenses regulations to refrain from negative effects made by income reallocation.In a word, we should view the financing vehicles in a dialectical prospective. There is no doubt that LGFVs have its irreplaceable strengths, while there are also risks. This paper just builds a simple analytical framework for LGFVs, while there are still numerous questions, such as how is the efficiency influenced by the capitalization rate of infrastructure, what is the specific mechanism of mechanism and the conduction mechanism of income distribution effects, etc.. All these should be solved in the further researches. |
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